Tokenized Deposits Could Spur Higher Borrowing Costs, Dallas Fed Warns

Researchers at the Federal Reserve Bank of Dallas have warned that tokenized deposits could lead to increased borrowing costs for US households and businesses. The economists, Rosie Levy and Srini Ramaswamy, argue that programmable deposit tokens combined with automated transfer mechanisms could make bank funding less 'sticky', allowing customers seeking higher yields to switch banks more quickly.

According to the researchers, if deposits became 10% more responsive to interest rates, banks' capacity to hold long-term loans and other assets could decline by approximately $700 billion on a 10-year-equivalent basis. Conversely, if deposits stayed at banks for 10% less time, this would imply a reduction of about $580 billion in the same terms.

The Dallas Fed analysis points to potential trade-offs for banks when deposit stability declines. One response could be holding larger portfolios of highly liquid assets, such as reserves and US Treasurys, or leaning more on term debt to maintain the lending book. However, both adjustments can come with costs, including increased reliance on wholesale funding or higher credit pricing.

Regulators and banks are already building shared blockchain-style networks intended to move tokenized deposits within the regulated banking system. The BankChain Alliance, a group of 39 US state banking associations, aims to develop a nationwide network for tokenized deposits, stablecoins, and automated settlement.